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A Case Against "National Champions"

A recent bout of mergers involving European companies has some calling for government intervention to help German companies on the international market. But monopoly watchdogs reject that idea.

The economy? The chancellor should let it be, some experts say

Earlier this year when the French company Sanofi took over the German-French pharmaceutical giant Aventis -- with support from the French govenment -- not only were eyebrows raised here in Germany, but the government was pressured to help German companies compete on the international market.

However, the German Monopoly Commission thinks otherwise. This body of government-appointed experts is charged with observing the development of competition in Germany and rejects the promotion of so called “national champions.”

France may have spent billions of euros propping its heavy industry, IT sector and the likes of the Concorde. But Martin Hellwig, the head of Germany’s monopoly commission, believes the German government should not make the same mistakes. He even argues that the government is not the right body to identify the national industrial champions of the future.

Coal production has long been a heavily subsidized industry in Germany

"Typically government aims to subsidize or give privileges to certain companies tends to be directed towards industries of the past or to politically well connected industries," he said, adding that factories in important constituencies that are critical for elections are an example. "It has nothing to do with a good use of public resources for economic policy.“

Companies, not economies, compete

Hellwig said the idea of trying to strengthen Germany’s international competitiveness by using subsidies to turn companies into global players is wrong. He said it is companies and not economies which compete internationally. He points out that national champions could even harm the national market.

"A policy that is directed to helping some firms, even if it is directed to helping some firms internationally, tends to burden others," he said. "Because prices adjust, exchange rates adjust, wages adjust and the changes in economic structure that are induced are beyond the government’s ability to forsee. They simply don’t have the information to do the right thing.“

As a general rule, competition policy is in the hands of the cartel office and the German regulatory authorities which apply the laws against restraints to competition. They do so very ably, but at the same time the German government prevents more competition in several areas, Hellwig said.

Unidentified managers of Deutsche Post show a airplane-model of the daughter company DHL

"In certain areas, where it is a question of changing laws, a question of adapting systems, liberalizing industries, getting rid of post monopolies like telecommunications, the postal system, the energy sector, the government, indeed, has been a bit too prone to maintaining incumbents of the past," he said, adding that this happened partly for fiscal reasons or furthering national champions.

"After all, the government is still a major shareholder," he said, citing the emergence of Deutsche Post as a global player in the logistics field.

Liberalization fails to bring more competition

Hellwig pointed out that another example is the energy market where liberalization didn’t bring about more competition in Germany.

"Germany unlike the United Kingdom has chosen not to vertically disintegrate the industry into companies managing networks, manging electricity grids and companies managing electricity production and distribution," he said. "So the network owners are parts of corporations that also produce and sell electricity and they use the transmission fees as a tool to keep competition out.“

When the liberalization process in the German energy market began three years ago, Germany was the only EU-country without a regulatory authority in this field. And regulating will only start next year.

This may be too late in the energy sector as German transmission prices of electricity are already excessive and among the highest in Europe.

In part this has been made possible and legalized by the government. It was no surprise when Vattenfall Europe, one of only four companies dominating the German energy market, announced last week to increase transmission prices by another 20 percent next year.

Telecommunications law under criticism

Also coming in for criticism from the monopoly commission is Germany’s telecommunications law. Hellwig said it’s structure and regulations introduce many changes with lots of legal uncertainty and will work in favour of the incumbent and to the disadvantage of the competitors.

"As long as prices are fixed under a price-cap regime where the regulatory authority sets just an upper bound for an overall index of prices, under the new law the incumbent is perfectly free to use any price to discourage entry, to impede competitors, even if it is a price below cost that would be regarded as predatory under ordinary competition law,“ he said.

Opposition politicians have welcomed the Monopoly Commission Report and appealed to Economics Minister Wolfgang Clement and Chancellor Gerhard Schröder to consider the commission’s proposed changes to the draft competition laws.